Decentralized Finance (DeFi) has revolutionized how users interact with financial services by offering permissionless, composable protocols where digital assets flow freely across platforms. At the heart of this ecosystem are DeFi lending protocols, which enable depositors to earn interest and borrowers to access liquidity—forming the foundation for advanced strategies like leveraged trading, short selling, and arbitrage.
Among the most established players in the Ethereum ecosystem are Compound and Aave. Despite broader market downturns, both platforms continue to hold over $15 billion in total value locked (TVL). Compound operates at a 25% asset utilization rate, while Aave reaches 32%. These two pioneers have defined the standard for decentralized lending, inspiring numerous code forks. Yet no competitor has surpassed their scale—until now.
Enter Euler Finance, a novel lending protocol that launched quietly after 18 months of development. Built from scratch with innovative risk management and governance mechanisms, Euler has quickly gained traction, surpassing $300 million in deposits within six months on Ethereum Mainnet. Backed by top-tier investors like Paradigm, Euler introduces key differentiators when compared to Compound, Aave, and newer entrants like Rari Capital.
This analysis compares these protocols across eight critical dimensions to reveal how Euler is redefining DeFi lending for a more diverse and dynamic asset landscape.
Self-Service Market Creation
One of the most significant limitations of legacy platforms is their slow onboarding process for new assets. Compound supports around 20 assets, and Aave supports about 30, mostly large-cap "blue-chip" tokens. Adding a new market requires governance votes and manual integration—including Chainlink oracle setup—making it time-consuming and centralized in practice.
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In contrast, Euler allows any user to create a new lending market automatically, without governance approval or developer intervention. This permissionless model has enabled Euler to support over 60 assets in just six months—including high-risk and long-tail tokens. The system relies on Uniswap V3’s time-weighted average price (TWAP) oracle with a 30-minute window, effectively mitigating price manipulation risks during market creation.
Users can launch new lending markets instantly—no voting, no delays.
This approach dramatically accelerates innovation and inclusivity in DeFi, empowering niche communities and emerging projects to access decentralized credit.
Oracle Risk Grading to Prevent Manipulation
While many protocols rely on Chainlink oracles (including Aave and Compound), Euler leverages Uniswap V3’s deep liquidity pools for price discovery. But Euler goes further by introducing an industry-first oracle quality scoring system.
Each market displays an oracle rating—High, Medium, or Low—based on trading depth and resistance to manipulation. More importantly, Euler shows real-time estimates of how much capital would be required to manipulate prices by ±20%, giving users clear visibility into potential attack vectors.
Additionally, Euler provides an oracle attack simulator, modeling how large trades impact asset prices based on actual pool liquidity. This transparency helps lenders and borrowers make informed decisions, especially when dealing with volatile or low-liquidity assets.
Compare this to Aave and Compound, which use Chainlink—oracles that aggregate data from multiple sources but offer less granular insight into manipulation costs. Euler’s proactive risk modeling represents a major step forward in on-chain security.
Tiered Asset Classification for Risk Isolation
Supporting diverse assets demands robust risk controls. Unlike Compound and Aave—which treat most approved assets as equally viable collateral—Euler implements a three-tier asset classification system:
- Collateral Tier: Low-risk assets like WETH, WBTC, USDC, and DAI. These can be used as collateral.
- Cross Tier: Medium-risk assets. Not eligible as collateral but allow multi-asset borrowing under a single collateral position.
- Isolation Tier: High-risk or volatile assets (e.g., emerging tokens). Borrowers must dedicate separate collateral for each isolated asset and cannot use them as collateral themselves.
This structure prevents cascading liquidations caused by volatile collateral collapsing in value—a common risk in homogeneous systems.
Smart tiering protects the system from high-volatility assets without blocking innovation.
By isolating risk at the protocol level, Euler maintains stability even as it embraces broader asset diversity.
Dual Risk Coefficients: Borrow & Collateral Factors
Traditional platforms use a collateral factor—a discount applied to抵押 assets based on volatility—to determine borrowing power. Euler enhances this model with a borrow factor, which adjusts the value of borrowed assets based on their own risk profile.
For example:
- Borrowing stablecoins (low risk) has a high borrow factor → higher borrowing power.
- Borrowing speculative tokens (high risk) has a low borrow factor → limited borrowing capacity.
This dual-coefficient system ensures that both sides of the loan are risk-adjusted, leading to more accurate health scores and reduced systemic risk.
Users benefit from real-time dashboards showing:
- Market value vs. risk-adjusted value
- Health factor
- Estimated time-to-liquidation
Such transparency empowers better decision-making in fast-moving markets.
Transaction Bundling to Reduce Gas Fees
On Ethereum, gas costs are a major friction point. Euler addresses this with its built-in Transaction Builder, allowing users to bundle multiple actions—such as depositing, borrowing, or repaying across several assets—into a single transaction.
Unlike third-party tools like Furucombo (which orchestrate cross-protocol interactions), Euler’s bundler works natively within its own system. This means only one price check per asset, regardless of how many operations are bundled—significantly reducing gas usage.
👉 See how smart transaction batching slashes DeFi trading costs.
When combined with Euler’s deferred liquidity feature, this tool also enables native flash loans, enhancing composability for arbitrageurs and developers.
Dutch Auction Liquidations to Reduce MEV
Liquidations are inevitable in over-collateralized systems—but they often create exploitable opportunities for bots and miners. In traditional models (used by Aave and Compound), liquidators receive fixed rewards (5–10%), triggering fierce competition driven by high gas bids. This leads to Miner Extractable Value (MEV) extraction, where miners front-run liquidations for profit.
Euler tackles this with a Dutch auction-style liquidation mechanism: the reward starts low and gradually increases until a liquidator claims it. The first profitable participant wins—favoring efficiency over gas wars.
Moreover, Euler introduces a Stability Pool, where lenders can deposit assets to fund liquidations internally. This eliminates reliance on external markets for liquidity and ensures consistent pricing during crises.
Together, these innovations reduce MEV leakage and promote fairer, more efficient liquidation processes.
Reserve Fund Optimization
Like Compound, Euler allocates a portion of interest payments to a protocol reserve fund for risk mitigation. But unlike Aave’s Safety Module—where staked tokens sit idle—Euler actively deploys its native token holdings back into the protocol to generate yield.
This compounding mechanism allows reserve funds to grow exponentially over time, increasing the protocol’s resilience during black-swan events.
The Next Generation: Euler vs. Rari Capital
While Euler builds its engine from scratch, Rari Capital’s Fuse takes a different path: it enables users to deploy custom lending pools as forks of Compound. Each Fuse pool operates independently, allowing permissionless market creation—but inherits all of Compound’s limitations and risks.
Rari’s history includes two major hacks (2021: $11M; 2022: $80M), including an exploit on Fuse Pool #90 where attackers manipulated FLOAT/USDC prices to over-collateralize loans. This incident underscores the need for proactive risk layering—something Euler addresses through its tiered asset model.
| Metric | Compound / Aave | Euler |
|---|---|---|
| Asset Support | ~20–30 | 60+ |
| Asset Utilization | <35% | ~70% |
| Market Creation | Governance-driven | Permissionless |
| Risk Modeling | Single-factor | Dual-factor |
Euler’s higher utilization rate reflects greater capital efficiency—enabled by smarter risk design rather than just more assets.
Frequently Asked Questions (FAQ)
Q: What makes Euler different from Aave and Compound?
A: Euler supports permissionless market creation, uses dual risk coefficients (borrow + collateral factors), implements asset tiering, and features Dutch auction liquidations—all designed for broader asset support and improved capital efficiency.
Q: Is it safe to lend on Euler with so many new assets?
A: Yes. Euler mitigates risk through oracle grading, isolation tiers for volatile assets, and real-time manipulation cost estimates. High-risk assets cannot be used as collateral, protecting the broader system.
Q: How does Euler reduce liquidation-related MEV?
A: By using Dutch auction-style liquidations where rewards increase slowly over time, encouraging efficient participation instead of gas wars. The Stability Pool further reduces reliance on external liquidity.
Q: Can I create my own lending market on Euler?
A: Absolutely. Any user can deploy a new market if the asset trades on Uniswap V3 with sufficient liquidity. No governance vote or team approval is needed.
Q: Why is transaction bundling important?
A: It reduces Ethereum gas fees by combining multiple actions into one transaction with fewer price checks—critical for cost-effective DeFi operations.
Q: How does Euler compare to Rari Capital’s Fuse?
A: While both enable custom pools, Euler uses original code with advanced risk controls. Rari’s Fuse is a Compound fork with known vulnerabilities and lacks features like asset tiering or dynamic liquidation models.
👉 Start exploring decentralized lending protocols with powerful risk tools today.
The evolution from first-gen platforms like Compound and Aave to next-gen systems like Euler marks a shift toward more adaptive, inclusive, and efficient DeFi infrastructure. As the ecosystem matures, protocols that balance innovation with robust risk management will lead the next wave of adoption.